This article examines beneficial ownership and whether an accountable institution must terminate a relationship with a client if the client has a beneficial owner in a sanctioned jurisdiction.
The Financial Intelligence Centre Act (FICA) defines a “beneficial owner” in respect of a legal person as the natural person who, independently or together with another person, owns the legal person or exercises effective control of the legal person.
Previously, there was little clarity on the specific shareholding thresholds for identifying beneficial ownership in private or public companies, although the Financial Intelligence Centre (FIC) has long required the identification of Ultimate Beneficial Owners (UBOs) under section 21B of FICA as part of the due diligence process. The Financial Action Task Force’s guidance on establishing and identifying beneficial owners of clients recommended identifying shareholders with an interest of 25% or more.
On 4 August 2024, the FIC issued Public Compliance Communication 59 (PCC 59), which reaffirms the need to identify UBOs through an elimination process of ownership and control but introduces a significant change.
According to the FIC, a good indicator of controlling ownership over a legal person is the percentage of total ownership interest, because a person who holds a sufficient percentage of ownership interest usually exercises influence or control over a legal person and benefits from that legal person. The FIC views that holding an ownership interest of 5% or more in a legal person is “usually” sufficient to exercise a controlling ownership interest in the legal person.
The FIC strongly recommends that an accountable institution identifies persons who hold 5% or more of ownership interest in a legal person, because these persons can be regarded as beneficial owners for purposes of section 21B(2) of FICA.
The term “controlling ownership interest” as used in section 21B(2)(a)(i) of FICA is not defined in the Act. The FIC interprets “controlling ownership interest” to mean “the ability of a natural person, by virtue of ownership interest in a legal person, to control and/or to take decisions regarding or influence the resolution, decisions and/or business operations of that legal person”.
PCC 59 further explains that where a natural person can exercise decisive influence directly or indirectly over the decisions of the legal person and/or the legal person’s operations due to their ownership interest, then that natural person owns a controlling ownership interest in that legal person.
Broadly, the identification of beneficial ownership occurs through a three-step process. Each step must only be followed if the previous step cannot determine beneficial ownership. In summary, the elimination steps include:
Step 1: Identifying the controlling ownership interest of a client.
Step 2: Determining whether control is exercised through other means.
Step 3: Determining whether control is exercised over management.
It is worth noting that the third step can be applied only in exceptional cases, because the identification of natural persons who exercise control over management should not supersede the identification of the beneficial owners. The identification process also differs based on the nature of the client.
Sanctioned entities vs sanctioned jurisdictions
If a client’s UBO is located in a sanctioned jurisdiction, this may trigger particular events under contractual arrangements, which can grant an aggrieved contracting party certain rights and/or remedies, such as early termination or prepayment.
A client with a UBO in a sanctioned jurisdiction increases the geographical risk of the client. From an accountable institution perspective, the client must be flagged as high risk. An accountable institution will need to assess the risk exposure to the business based on its risk-based approach. This may result in proceeding with the relationship by taking enhanced due diligence measures or terminating the relationship (and/or declining the relationship at the onboarding stage).
PCC 44A requires accountable institutions continuously to screen against the United Nations Security Council resolutions, domestically known as the Targeted Financial Sanctions (TFS) list, freeze assets of designated persons or entities immediately, and file reports with the FIC.
No person may enter a relationship with a sanctioned person or entity (that is, a person or entity appearing on the TFS list). FICA prohibits any person from directly or indirectly dealing with a sanctioned person or entity and/or property associated with such person or entity.
If a client’s UBO is a sanctioned entity or person, this relationship must be terminated immediately and reported to the FIC in accordance with FICA.
This article was written by Mariam Ismail and Tshegofatso Gouwe, who are associates at Webber Wentzel, and Lenee Green, who is a partner at the same law firm.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional legal advice.
“If a client’s UBO is a sanctioned entity or person, this relationship must be terminated immediately and reported to the FIC in accordance with FICA.”
I believe this sentence is not correct, as UBOs can only be natural persons.
Furthermore, termination of the relationship is not prescribed where an existing client’s UBO is listed, see paragraph 53 of PCC44A. What is required is that there is an asset freezing and reporting to the FIC. De-risking or client relationship termination may result in valuable information that could be of value to the FIC being lost (paragraph 132 of PCC44A) and may even be regarded as tipping off in some cases. I therefore am of the opinion, that it should therefore not be advised to terminate the existing business relationships where a client’s UBO is listed.
Lenee Green, a partner at Webber Wentzel, responds:
Thanks for your interest shown and input – we agree that UBOs are natural persons. In the assessment of the ownership structure of a client, an accountable institution will identify all persons/entities with a controlling ownership interest (this analysis will also include identifying companies with a controlling interest) as part of this assessment (and depending on the nature of the client) the accountable institution must screen these entities/persons against the TFS list – if the accountable institution notes that a shareholder/or person with a controlling interest is a sanctioned entity or person, then regard must be had to section 26B(2) of FICA. This provides: no person may, directly or indirectly, in whole or in part, and by any means or method deal with, enter into or facilitate any transaction or perform any other act in connection with property which such person knows or ought reasonably to have known or suspected to have been acquired, collected, used, possessed, owned or provided for the benefit of, or on behalf of, or at the direction of, or under the control of a person or an entity identified pursuant to a resolution of the Security Council of the United Nations contemplated in section 26A of FICA. Practically, one must consider the impact with reference to the existing relationship (onboarding v continued relationship) and report to FIC in terms of section 28A, attending to the freezing if applicable, and collectively decide on the best way forward in the circumstances, the net effect being that the relationship will be terminated.